2-2Time linesShow the timing of cash flows.Tick marks occur at the end of periods, so Time 0 is today; Time 1 is the end of the first period (year, month, etc.) or the beginning of the second period.CF0CF1CF3CF20123I%

2-3Drawing time lines1001001000123I%3 year $100 ordinary annuity100012I%$100 lump sum due in 2 years

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2-5What is the future value (FV) of an initial $100 after 3 years, if I/YR = 10%?Finding the FV of a cash flow or series of cash flows is called compounding.FV can be solved by using the step-by-step arithmetic, financial calculator, and spreadsheet methods.FV = ?012310%100

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2-7Solving for FV:The calculator methodSolves the general FV equation.Requires 4 inputs into calculator, and will solve for the fifth. (Set to P/YR = 1 and END mode.)INPUTSOUTPUTNI/YRPMTPVFV3100133.10-100

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2-8PV = ?100What is the present value (PV) of $100 due in 3 years, if I/YR = 10%?Finding the PV of a cash flow or series of cash flows is called discounting (the reverse of compounding).The PV shows the value of cash flows in terms of today’s purchasing power.012310%

2-10Solving for PV:The calculator methodSolves the general FV equation for PV.Exactly like solving for FV, except we have different input information and are solving for a different variable.INPUTSOUTPUTNI/YRPMTPVFV3100100-75.13

2-11Solving for I:What interest rate would cause $100 to grow to $125.97 in 3 years?Solves the general FV equation for I.Hard to solve without a financial calculator or spreadsheet.INPUTSOUTPUTNI/YRPMTPVFV380125.97-100( 293110097.125I+=

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